Texas’ oil and gas industry continues to show improvement

Dallas-based Comerica Bank said Texas economic activity is rising as oil producers become more efficient.

Dallas-based Comerica Bank said Texas economic activity is rising as oil producers become more efficient.

Photo: John Davenport /San Antonio Express-News

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As oil prices have rallied the last few months, more rigs have been put into service in West Texas’ prolific Permian Basin Shale play and to a lesser extent South Texas’ Eagle Ford Shale

As oil prices have rallied the last few months, more rigs have been put into service in West Texas’ prolific Permian Basin Shale play and to a lesser extent South Texas’ Eagle Ford Shale

Photo: John Davenport /San Antonio Express-News

Texas’ oil and gas industry continues to show improvement

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The Texas oil and gas sector has seen its fortunes rise for a second month in January after snapping a 24-month losing streak at the end of 2016, according to a new report by a state energy group.

The Texas Petro Index — which measures the health of the state’s oil and gas industry using measures such as drilling rig counts and oil prices — posted a January figure of 153.3, up from 150.6 in December and 148.0 in November. The November reading was the lowest since 2005. The index’s peak was in November 2014, when it posted a reading of 313.5.

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Karr Ingham, an economist who tracks the index for the Texas Alliance of Energy Producers, said U.S. oil companies have found ways to make $50 oil work for them, and forced the Organization of Petroleum Exporting Countries to agree to cut their own production. Oil has stabilized at above $50 a barrel after hitting a 13-year low of $26 a barrel in February 2016.

“I don’t care what they do,” Ingham said of OPEC, which agreed in November to cut production for six months. “I think we’ve proven that we can operate in the United States regardless of what they’re doing. We’re going to respond to a price whatever that is.”

Oil prices fell more than 5 percent Wednesday on news that U.S. oil stockpiles grew despite the OPEC and non-OPEC producer cuts.

OPEC’s November decision came nearly two years to the day after the group decided to continue pumping large amounts of crude in November 2014 was in response to already declining prices. Ingham believes their strategy to price-out high-cost producers failed.

“(OPEC thought) production was going to peak almost immediately and fall and fall quickly” in the U.S., Ingham said. “That didn’t turn out to be the case. Production peaked in the second quarter of 2015 but it’s not like it just fell off the cliff.”

Oil prices plummeted from a high of $107 a barrel in June 2014 to $26 in February 2016, driven by a November 2014 decision by Saudi Arabia and fellow members of the Organization of Petroleum Exporting Countries to continue pumping high levels of oil into an oversupplied market.

After the OPEC decision U.S. oil production peaked at 9.6 million barrels per day in April 2015 and fell to 8.6 million barrels per day in September 2016 as the industry lagged behind oil prices and budgets were slashed. Production has recovered slightly to 8.8 million barrels per day in December, the most recent data available from the Energy Information Administration.

In November, OPEC announced it was making production cuts to prop up prices, a decision that was shortly followed by pledges from non-OPEC oil producers, including Russia, to also cut production. In total, the oil producers aim to cut 1.8 million barrels a day of crude oil production. A recent Goldman Sachs report indicated that at least 93 percent of the cuts have been made.

“They had been frustratingly waiting on the sidelines for something that happened here that really didn’t happen to the extent or on the time frame they would hope would happen,” Ingham said.

OPEC’s pledge to cut production was the only way they could reduce the glut of oil on the global market, which at its worst was estimated to be around 2 million barrels of oil a day. Record stockpiles of crude oil continue to be stored in tank batteries on land and storage ships floating offshore around the world.

Ingham doesn’t believe prices will fluctuate much higher than where they are now in the low- to mid-$50s a barrel. He said any upward price movement only encourages American drillers to bring more oil online, adding more oil to the market.

“My concern about the OEPC agreement is it has a finite date,” Ingham said. “I’m not too worried about us … but to sustain prices where they are or cause them to go any higher, if this (OPEC) agreement comes to an end and they take production levels right back to where they were what in the world makes us think prices aren’t going to decline back to where they were?”